Claim for Coverage for Consequential Property Losses

The original version of the California Code of Regulations, Section 2695.9. Additional Standards Applicable to Fire and Extended Coverage Type Policies with Replacement Cost Coverage provided: (a) When a loss requires repair or replacement of an item or part, (b) any consequential physical damage incurred in making the repair or replacement not otherwise excluded by the policy shall be included in the loss…. (d) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all items in the damaged area so as to conform to a reasonably uniform appearance; (e) This is the “line of sight” rule.

It has been replaced with the following:

(a) When a residential or commercial property insurance policy provides for the adjustment and settlement of first party losses based on replacement cost, the following standards apply:

(1) When a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making the repair or replacement not otherwise excluded by the policy shall be included in the loss. The insured shall not have to pay for depreciation nor any other cost except for the applicable deductible.

(2) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all items in the damaged area so as to conform to a reasonably uniform appearance.

By taking out the “line of sight” wording, the state of California made the requirement broader by using language that requires the insurer to “conform to a reasonably uniform appearance” which is subjective and will require the insurer to be more generous in its payments. Most states apply the “line of sight rule” or the requirement that settlement provides a reasonably uniform appearance. With or without the Regulation like that imposed by the state of California, litigation often results. Such was the case in Great American Insurance Company of New York v. The Towers of Quayside No. 4 Condominium Association, Slip Copy, 2015 WL 6773870 (S.D.Fla., 11/05/2015) where the District Court for the Southern District of Florida was called upon to deal with damage to a 25-story condominium building who wanted replacement of both damaged and undamaged portions of the building to allow all 25 floors to be aesthetically the same.

Great American moved for Summary Judgment.

BACKGROUND

Great American issued Quayside a property insurance policy that provided first-party property insurance coverage for the premises located at 4000 Towerside Terrace, Miami, Florida 33038, which includes a condominium building that is the subject of this action. A release of water from a broken valve on an air conditioning unit in the building caused water damage to the drywall, carpeting, baseboards, insulation, and wallpaper in the east hallways of the eleventh floor and the floors below. Floors three through twenty-five of the building have a uniform appearance by design with respect to the carpet, wallpaper, and woodwork in the common area hallways. The carpeted east hallways of the building are separated from the carpeted west hallways by a tiled elevator landing on each floor.

Quayside submitted a claim to Great American for loss and/or damage to the building arising from the release of water, including loss and/or damage to drywall, carpeting, baseboards, insulation, and wallpaper of the east hallways of the eleventh floor and floors below. Great American paid Quayside a total of $170,291.84 for the damage to the east hallways of the eleventh floor and the floors below. Quayside asserts that this amount does not fully compensate it for the direct physical loss caused by the water damage.

Quayside sought coverage to repair or replace undamaged carpeting, wallpaper, baseboards, and woodwork in 1) the west hallways and elevator landings of the eleventh floor and floors below and 2) floors twelve through twenty-five. Quayside contends it is entitled to repair or replacement of these undamaged components because 1) it will otherwise not be possible to achieve aesthetic uniformity between the new carpeting, wallpaper, baseboards, and woodwork installed in the area that suffered water damage and the rest of the building and 2) the loss of aesthetic uniformity devalues the building and constitutes a loss to the building. Great American disputes this position, and informed Quayside that no coverage is available for repair or replacement of building components that were not physically damaged.

THE POLICY

The policy’s Difference in Conditions (DIC) Coverage Form provides: “We will pay for your ‘loss’ to Covered Property from a Covered Cause of Loss.” The DIC Declarations form provides: “DIC Direct Physical ‘Loss’ The most we will pay for direct physical ‘loss’ from a Covered Cause of Loss … is … [the limits of insurance set forth in the policy.]” As amended by an endorsement, the policy defines “Covered Cause of Loss” as “direct physical loss” to Covered Property, except those causes of “loss” listed in the exclusions. Through its Specified Cause of Loss Form, the policy specifically excludes coverage for consequential loss, which it defines as “Delay, loss of use, loss of market, or any other consequential loss.”

DISCUSSION

The policy plainly only provides coverage for “direct physical loss,” specifically excludes coverage for consequential loss, and makes no mention of “matching” or “aesthetic uniformity” at all. While the Court concluded that coverage for matching, for the purpose of achieving aesthetic uniformity, is appropriate where repairs concern “any continuous run of an item or adjoining area” for materials such as wallpaper, baseboards, woodwork, and carpeting, it is plain that matching is not otherwise required under the policy. To hold otherwise would do violence to either the parties’ mutual duties of good faith or the plain terms of the policy.

Accordingly, the Court concluded that Great American is entitled to a declaration that it has no obligation to provide coverage to replace: 1) undamaged components on floors twelve through twenty-five or 2) undamaged carpeting in the west hallways of floors three through eleven.

However, as it is unclear whether the wallpaper, baseboards, and woodwork on floors three through eleven form a continuous run from one end of the building to the other, or whether these components are separated from each other in the same manner the carpeting in the east and west hallways is separated by the central elevator lobby on each floor, Great American has failed to establish it is entitled to summary judgment with respect to whether it must provide “matching” coverage for these components. That determination is left to the presentation of further evidence.

ZALMA OPINION

First party property insurance is designed to indemnify the insured for losses incurred. It is not a means of remodeling and making new a 25-story condominium structure. Although the lack of a complete match of materials throughout the structure might not be aesthetically perfect, the contract did not promise to pay for both direct and consequential losses. The District Court refused, therefore, to rewrite the policy. It followed the “line of sight rule” or the need to provide a reasonably uniform appearance codified by California.

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Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

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